WELLNESS & WELL-BEING
How Do You Learn to
Invest in Stocks?
LESSON TWO
By Donald Broughton
L
ast month, we talked about the basics: Index funds
participate on the way up, but also participate on the way
down; buying individual stocks can allow you to capture
the upside, and not fully participate on the downside;
looking at what you are spending your money on, and
finding companies that can sell more at higher prices.
First, we have to make a legal disclaimer: This is not a solicitation.
If you do something I suggested, and it doesn’t work out, I am not
responsible. Investing in stocks involves risk, and you can lose all your
money. All right, now, let’s keep talking about one of my favorite topics.
So, you’ve found a company whose product or service you really like.
You and your friends spend much of your money with that company.
That means you already know the company well - at least from a
customer perspective. Dig in further. Just like anything else in life, being
successful at investing in stocks involves doing some extra work.
Step 1: Ask your broker for any research reports they might have on
this company, and read those reports. Know that these reports tend to
have a positive bias, but are often a great source for general information,
and will quickly point you to some of the issues that professional
investors are concerned about.
Step 2: Go to the U.S. Securities and Exchange Commission’s website
at sec.gov, and enter the company’s name (or stock symbol if you have
it). Locate and read the 10-K (annual report). You will be surprised at
how much you learn. In this report, the company will describe where
its revenue comes from, how it spends its money, how much profit it
makes on each dollar of sales, and what the risks are to its business.
Step 3: Go to the company’s website, find the investor relations
section, sign up for news releases and any other information that is
offered.
Step 4: Learn some basic math. If you buy a 10-year bond for $1,000,
and it yields 5 percent, that means you should receive $50 in interest
payments per year, and when the bond matures, you should receive
your principle of $1,000 back. We understand that many bond yields
are currently lower than 5 percent, but we are trying to keep the math
simple.
When looking at stocks, people often refer to the price-earnings
ratio. A P/E ratio is a bond yield flipped on its head; the inverse. Here’s
the math: $50/$1,000 = 5 percent or $1,000/$50 = 20. If a company’s
stock sells for $1,000 per share, and the company earns $50 a share in
earnings, then the company’s stock sells for a P/E of 20. This is also
known as an “earnings multiple.” This is also the market’s way of saying,
“We think this company will grow earnings by more than 5 percent a
year, but not by a large amount more than 5 percent.”
In summary, Rule No. 1: Find a company that can sell more at higher
prices. Rule No. 2: Dig in, read, and learn how the company generates
revenue, makes profit, and what the market thinks it is worth.
As founder and managing partner of Broughton
Capital, Broughton is a frequent guest on CNBC, “Nightly
Business Report”and Fox. He is regularly quoted in The
Wall Street Journal, where he is also recognized as a top
stock picker, as he is by Fortune, Zacks and StarMine.
SAVVY I SOPHISTICATED I SASSY
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